IQ and wealth, continued

Some people get annoyed by the idea that wealth and IQ are strongly linked. They say “look at all those smart people who are not rich!”

At the low-end of IQ, such as around 80-95, people have fewer career choices, and the correlation between wealth and IQ is stronger. Someone with a high IQ can choose between a profession that makes a lot of money or one that does not, so the correlation is not as strong. I however, disagree that this proves IQ is not important for the attainment of wealth, because one must take into account individual preferences and relative wealth and success. The problem with most wealth versus IQ studies, as I discuss earlier, is that they lump people of differing socioeconomic backgrounds and preferences together.

Among young young people who strive to be wealthy, such as with investing, option trading (such as on /r/wallstreetbets), career related, how important is IQ? I suspect very important. These studies lump all ages and preferences together, and then predictably the correlation is weak. So among 20 to 40-year-olds in career settings who are striving to earn as much money as possible, high IQ people make more money, such as in STEM, legal, or medical. Less intelligent people are more likely to be stuck in low-paying service jobs.

So among option traders on the hugely popular Reddit sub /r/wallstreetbets, IQ, I suspect, is highly correlated with success at trading options as measured by variables such as return on capital and risk-adjusted returns. Just based on my own empirical observations using proxies/markers for IQ such as writing ability, karma score (Reddit karma is positively correlated with IQ), and choice of major/degree, etc., the most successful and consistent of traders have markers consistent with high IQ.

This seem to be corroborated by studies, for examplem from 2012 Journal of Financial Economics IQ, trading behavior, and performance:

We analyze whether IQ influences trading behavior, performance, and transaction costs. The analysis combines equity return, trade, and limit order book data with two decades of scores from an intelligence (IQ) test administered to nearly every Finnish male of draft age. Controlling for a variety of factors, we find that high-IQ investors are less subject to the disposition effect, more aggressive about tax-loss trading, and more likely to supply liquidity when stocks experience a one-month high. High-IQ investors also exhibit superior market timing, stock-picking skill, and trade execution.

Furthermore, wealth includes stock options, real estate, and securities. My hypothesis is based the observation that returns for various asset classes over the past 30 years on an inflation adjusted basis have been very strong relative to past decades, which had higher inflation.So a smart person today who makes $200k/year can compound his wealth in many ways such as with real estate or stocks and earn a high real return, whereas 50 years ago the real returns were not as good.

The emphasis here is relative wealth among one’s peers assuming similar individual preferences. We’re not interested in comparing the wealth of a 25-year-old college graduate versus an 80-year-old.